Senators Seek Details About Bear Stearns Deal

EDMUND L. ANDREWS

Thursday

Mar 27, 2008 at 4:37 AM

Senators are demanding information about how the Federal Reserve arranged the $30 billion shotgun marriage of JPMorgan Chase and Bear Stearns.

WASHINGTON — Senior senators signaled their unease on Wednesday with the Federal Reserve’s shotgun marriage of JPMorgan Chase and Bear Stearns, demanding detailed information by next week about how the $30 billion deal was reached.

The challenge from Capitol Hill is the most striking shot in a rising political battle about whether the Fed’s decision to provide emergency loans to major Wall Street investment banks should be accompanied by stricter regulation over their activities — as is already the case for commercial banks.

Treasury Secretary Henry M. Paulson Jr. defended the Fed’s rescue of Bear Stearns in a speech on Wednesday and resisted calls by some Democrats for greater regulation of Wall Street.

“Recent market conditions are an exception from the norm,” Mr. Paulson said in a speech at the Chamber of Commerce of the United States. “The Federal Reserve’s recent action should be viewed as a precedent only for unusual periods of turmoil.”

Though Mr. Paulson said that Wall Street firms should provide more information about their financial condition if they borrow money from the Fed, he said that investment banks were still fundamentally different from commercial banks and did not endorse any proposals for tighter regulation.

But in the Senate, the two leading members of the Finance Committee raised questions about policies being pursued by the Fed and the Bush administration in dealing with the credit crisis.

“Americans are being asked to back a brand-new kind of transaction, to the tune of tens of billions of dollars,” wrote Senator Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, and Senator Charles E. Grassley of Iowa, the senior Republican on the committee. “Congress has a responsibility to look at whether the taxpayers will lose money here.”

Senator Chris Dodd, chairman of the Senate Banking Committee, also announced a hearing for next Thursday on the Bear Stearns deal and summoned Mr. Paulson, along with Ben S. Bernanke, chairman of the Fed, and Timothy F. Geithner, president of the Federal Reserve Bank of New York.

The senators did not mention any specific suspicions about the deal, but the range of their requests suggested concerns about the motives of the various negotiations, the soundness of the deal and the potential precedent for future bailouts. Lawmakers made it clear they also had questions about the government’s broader response to the widening financial crisis and the soaring rate of home foreclosures.

In the deal announced on Monday, the Fed agreed to lend JPMorgan Chase $29 billion and to hold as collateral what Fed officials estimated were $30 billion worth of mortgage-related assets owned by Bear Stearns. Working together, Fed and Treasury officials were convinced that Bear Stearns was about to go bankrupt and set off a systemic breakdown in financial markets.

But scores of questions remain unanswered. No one knows the real value of the assets formerly owned by Bear Stearns that the Fed agreed to take as collateral. Fed officials have said they greatly discounted the value of those assets before agreeing to the $29 billion loan, but they have offered no detail of what those assets actually look like.

Mr. Baucus and Mr. Grassley, on the Senate Finance Committee, demanded that the Treasury and Fed provide a detailed list of Bear Stearns assets, as well as a memorandum on the sequence of events leading up to the deal, the names of every participant in the discussions, including those of lawyers, accountants and other advisers.

Mr. Dodd said the agreement “raises serious public policy questions” about the role of the Fed, the Treasury and the Securities and Exchange Commission as the deal’s “facilitators.”

The broader question for lawmakers is whether the Fed’s rescue, and its simultaneous decision to let the nation’s biggest investment banks borrow from its discount window, mean that the Fed should subject Wall Street firms to the same scrutiny and regulation as it now imposes on commercial banks.

For the first time since the Depression, the Fed announced on March 16 that big investment firms would be allowed to borrow billions of dollars from the Fed’s so-called discount window.

The discount window is normally reserved only for commercial banks and other depository institutions, which in exchange subject themselves to closer scrutiny and stricter capital reserve requirements.

Several leading Democrats in Congress are now calling for tighter regulation of Wall Street firms, saying that they are getting some of the same protection as commercial banks without the same kind of regulation.

Mr. Paulson acknowledged that the Fed’s decision had created a contradiction between how commercial and investment banks are treated. He said that investment banks should be subjected to “the same type of regulation” if they were to have “regular” access to the Fed’s discount window.

But Mr. Paulson quickly added that the Fed’s offer to the investment banks should be seen as the exception to the rule.

Mr. Paulson also took a swipe at Democratic proposals to have the government refinance millions of troubled mortgages to reduce what is expected to be a tidal wave of home foreclosures.

“I know members of Congress have outlined other ideas,” he said, “but most are not ready for the starting gate.”

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